British household incomes hit by austerity measures

British households were poorer in 2011 than they were in 2010 and expect the
Chancellor’s sweeping austerity plan to make life more difficult in the
future, Bank of England research found.

Around half of households reported that the Chancellor’s austerity programme had made life more difficult.Photo: Alamy

By Philip Aldrick and Angela Monaghan

8:29PM GMT 18 Dec 2011

Families reported that available income had fallen by £46 a month on average in 2011, as the squeeze on living standards intensified.

It was the fifth consecutive year of declining income according to the annual survey of household finances by NMG Consulting, published in the Bank’s Quarterly Bulletin.

Around half of households reported that the Chancellor’s austerity programme had made life more difficult. However, while 48pc of households said they were paying more as a result of VAT or had lost their job in the public sector cutbacks, 69pc expected to be hit in the future.

“A much larger share of households were concerned about losing their job in the future as a result of the fiscal measures, than had reported that they had lost their job as a result of the fiscal measures over the past year,” the report said.

Around half of households said they had taken some action in response to austerity, including looking for a new job or working longer hours, while others planned to save more.

With families still under pressure, levels of household distress remained higher than normal in 2011 – with 12pc reporting difficulty paying their accommodation costs in the past 12 months, the same as in 2010.

Those suffering the most were outright homeowners, who were on average 62 years old, and renters. Distress among mortgage holders fell.

“Distress is likely to have been pushed up by increasing bills and rents but, for mortgagors, the effect of higher bills may have been more than outweighed by a fall in mortgage repayment gearing,” the report said.

At least 1.5m homeowners would have to get a second job, work longer hours or dip into savings if interest rates were to rise by just one percentage point, according to the survey.

It found that a fifth of mortgage borrowers on variable rates “would need to take some action if rates were to increase by one percentage point immediately”. Of the 11m mortgages in the UK, 7.8m are variable.

The survey illustrates just how vulnerable households are to interest rate rises, despite rates being at a historic low of 0.5pc. Earlier this year, the Council for Mortgage Lenders warned that if borrowing costs were to rise by two percentage points, 3m mortgages would be deemed “unaffordable” under Financial Services Authority guidelines.

The average variable mortgage rate in the UK is 2.75pc, far lower than at any period on record before the onset of the financial crisis. The Bank stressed that markets currently do not expect rates to rise by a percentage point until 2016.